Investing in the Financial Sector of Emerging Countries: Potential Risks and How to Manage Them

Banco de Espana Estabilidad Financiera, No. 5, November 2003

303 Pages Posted: 13 Jan 2012

See all articles by Alicia García-Herrero

Alicia García-Herrero

Natixis ; BBVA Research; Bruegel

Sonsoles Gallego Herrero

Banco de España

Cristina Luna

affiliation not provided to SSRN

Date Written: November 1, 2003

Abstract

The purpose of this article is to assess how the changing operations of international banks in emerging countries in the last decades have altered the risks they face as well as their mitigation techniques. The recent expansion of the international banking business through the setup of branches and subsidiaries has increased business potential, but has also changed the nature of the risks faced. Nevertheless, it is hard to determine whether risks, on the whole, are larger now than when cross-border operations were the main instrument for international banks’ activity. In addition, the article describes the various channels through which the risks faced by banks operating in emerging countries increase in times of crisis, especially when operating locally and in highly dollarized host countries, as shown in the latest crisis events. While the financial independence of subsidiaries may be considered an important tool of risk control, the possibilities to mitigate risks in local markets during times of crisis are generally scarce. This could be due to the relatively recent expansion of foreign banks’ local operations in emerging countries, as compared to the cross-border business, together with the relative underdevelopment of local financial markets, or perhaps to the nature of the local business itself.

Note: Downloadable document is in Spanish.

Suggested Citation

Garcia-Herrero, Alicia and Gallego Herrero, Sonsoles and Luna, Cristina, Investing in the Financial Sector of Emerging Countries: Potential Risks and How to Manage Them (November 1, 2003). Banco de Espana Estabilidad Financiera, No. 5, November 2003. Available at SSRN: https://ssrn.com/abstract=1983870 or http://dx.doi.org/10.2139/ssrn.1983870

BBVA Research ( email )

C/ Azul,4. Edificio La Vela. Planta 4
Madrid, 28050
Spain

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

Sonsoles Gallego Herrero

Banco de España ( email )

Madrid 28014
Spain

Cristina Luna

affiliation not provided to SSRN ( email )

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